"The Spirit in the Walls:" Apattern for High Performance at Scania

"The Spirit in the Walls:" APattern for High Performance at Scania H. Thomas Johnson and Anders Brams cania, the Swedish maker of heavy-duty trucks, level focuses on "the spirit in the walls" that modular buses and diesel engines, has parlayed a modular thinking creates. Sproduct design strategy into a robust formula for Finally, a concluding section explores resemblances low costs and sustained profitability. But modularization between modularization at Scania and patterns of modu has contributed to Scania's high performance for more larization found in nature. reasons than just effective design, component standard Part-Number Counts and Low Cost: ization, and parts commonality. It also has created a cus It's More Than Meets the Eye tomer-focused mode of thinking among the company's Everyone believes that a manufacturer will improve managers that is referred to as "the spirit in the walls." costs and profitability by reducing the number of differ This spirit supports a unique web of relationships with ent parts in its products. And for good reason. With fewer patterns that transmit profit-enhancing behavior among different parts, less effort and resources are required to Scania people. design, make, and service a product line. Accordingly, Scania people achieve superior financial perfor activity-based cost management systems routinely use mance records by focusing their attention on mastering part-number count as a cost driver to estimate how much and executing patterns resembling those found in nature, chiefly the pattern that seems implicit in the process of evolution itself. Their approach to modularization Scanla at a Glance enables them to build increasingly complex varieties of With headquarters located in Sodertalje, Sweden, about 50 kilometers south of customer-pleasing products and services upon a founda Stockholm, Scania is aworld-wide manufacturer and marketer of heavy trucks (16 GVW tion of exceedingly parsimonious means. More than any tons and above), buses for over 40 passengers, and industrial/marine diesel engines. thing else, their ability to execute results that are "rich in Following acommon pattern among European truck builders, Scania is ahighly integrat ends, but simple in means" accounts for Scania's ed producer, making all critical components that go into its trucks. The company employs remarkable success. around 20,000 people worldwide, with production facilities in five countries - Sweden, the Netherlands, France, Brazil, and Argentina - and assembly plants in more than a This brief case highlights the pervasive influence of dozen additional countries. Scania trucks, buses, and engines are sold in over 100 coun Scania's modular design strategy by starting at the most tries on all continents. Over 95 percent of Scania's output is sold outside Sweden, with basic level with a discussion of part-number commonali about 60 percent going elsewhere in Europe. However, Scania's largest single national ty. The discussion then advances through three succes market in all its products is Brazil. Alone among truck makers in the world, Scania has sively higher levels of generalization: The first level been profitable every year for more than 30 years, despite the very cyclical nature of its considers certain interactions between product and pro markets. As of early 1995 Scania's worldwide sales of trucks and buses are at record cess design; the second examines the change in thinking levels, more than 45,000 units per year. In 1994 the company registered operating that modularization has generated at Scania; the third income of about SEK 4billion on revenue of about SEK 22 billion. (7.5 SEK~1 U.S.) 9 Mayljune 1995 Every truck Scania sells is designed and built to cus tomer order. Nevertheless, they use about half as many dif ferent part numbers to produce the same number of trucks as does their nearest competitor, Volvo. Not surprisingly, Scania's profitability exceeds that of Volvo. But other man ufacturers should not assume, therefore, that they can match, or even come close to Scania's performance simply by using cost-based targets to drive design engineers to reduce part-number counts. Indeed, low costs and robust profitability do not come to Scania by driving employees Figure 1. Cab transport from Oskarshamn to Scania's chassis-assembly in Angers, and suppliers to achieve cost targets. They come from dis France. ciplined attention to mastering design details and from company-wide commitment to goals that transcend local financial performance will improve by reducing the self-interest. In short, Scania excels by focusing on how it number of different parts. does business, not by focusing on eliminating cost However, it is not well understood that cost-driver drivers, such as part numbers, in order to cut costs. information may capture only a small fraction of the Modular Product Design: financial improvement that part-number austerity makes "Rich in Ends, But Simple in Means. " 1 possible. This is because such information assumes a lin Leif Ostling faced a daunting challenge in 1989 ear and essentially static relationship between costs and when he took over the reins as the youngest general man part-number count. It focuses attention on what work to ager (CEO) in Scania's century-long history. For decades do - reduce the number of different part numbers Scania had enjoyed a reputation as one of Europe's pre but it implicitly assumes that continuing to pursue busi mier manufacturers of heavy trucks and buses. Moreover, ness as usual is how work is to be done. In other words, they had turned a profit during every one of the past 30 or activity-based cost-driver information tells managers to so years, a record unmatched anywhere in the world in reduce costs by eliminating a cost driver (such as part their highly cyclical industry. The challenge Ostling faced numbers); it does not necessarily provoke inquiry into how a company's modus operandi causes part-number was to perpetuate Scania's fine reputation for quality and count to affect profitability. Managers who are driven by to continue the company's unbroken profit streak while these cost-based targets to economize on part numbers, leading the way to changes that will keep Scania compet but who still conduct business as usual, never will know if itive in the global economy of the 1990s, and beyond. a different approach to doing business might reduce part To address this challenge, Ostling identified key numbers and yield even deeper and longer-lasting finan forces responsible for Scania's past success. His own cial improvement. career with the company, stretching back almost 20 Scania offers a fascinating glimpse into the extraor years, certainly made him familiar with the company's dinary gains a company can capture by asking new ques current policies and practices. But he felt more should be tions rather than by driving business as usual with cost done to articulate definitively the origins and evolution targets. Like Toyota among auto makers, Scania stands of those forces that seemed to set Scania apart from the alone among heavy-truck makers for low costs, for high pack. Therefore, he asked two consultants (SAM quality, and for an unbroken record of annual profits that Samarbetande Konsulter AB, a Swedish consulting firm, stretches back at least 30 years. Also like Toyota, Scania and H. Thomas Johnson, an American business author achieves low costs without using cost targets to drive peo and professor) to conduct interviews with retired and ple's work. Scania is an excellently-managed company current Scania executives. From those interviews and with a unique approach to business that has enabled other research, this consulting team identified several them to achieve low costs and robust profitability while factors responsible for Scania's success (see box on p. manufacturing custom-made trucks and buses that are 11). Among those factors, however, the one that all par unrivaled for quality and performance. ties considered most important was the company's long- 10 Target Volume 11, Number 3 Key Factors Contributing to Scania's Success When asked to explain their company's remarkable success, current and retired Scania executives of the past 30 years recently Iisted the following practices: • expansion into new export markets slowly and deliberately, but continuously standing modular design strategy. • product range limited to medium and heavy trucks Modular product design has recently taken hold in • trucks assembled from carefully engineered modules built from aparsimonious set of many industries, including home building, small tool standardized components making, clothing manufacture, and even auto manufac • strong in-house design and development capabilities, without ignoring advances turing. Scania's design engineers began to explore the made by competitors concept as far back as 1970 and had a full-blown modu • rational production methods to build key components in-house larization program for trucks in place by 1980. The • saying no to making things that other companies do better objectives of this modularization program were to provide • development of close relationships with suppliers and vendors custom-built solutions to different transport problems, to • simplification of products and processes; reduction of tasks not associated with the core fabricate standardized components at mass-production business; encouragement of close cooperation between marketing and technical people costs, and to make it easier to modify truck designs as • knowing the value delivered to customers, holding the line on price and doing every new conditions arose. In other words, Scania adopted a thing possible to sustain high residual value for trucks modular design strategy in order to provide each cus • top managers must be engineers who grow up with who know the tomer with a high quality, cost effective, tailor-made processes and put profit before volume truck and simultaneously provide itself, Scania, with • every manager must know what it takes sell the best trucks high long-term profit.

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